Moody’s confirms FCT’s Baa1 rating; outlook negative

MOODY’S Investors Service yesterday confirmed the Baa1 corporate family rating of Frasers Centrepoint Trust (FCT). The outlook for the rating is negative.

This concludes the review for possible downgrade initiated on Oct 20, 2008, said Moody’s.

‘The rating confirmation reflects FCT’s good franchise value and relatively stable income stream supported by its well-located suburban retail assets. In Moody’s opinion, these assets are at the lower end of the asset risk spectrum as they mainly provide tenants with non-discretionary household items,’ said Kathleen Lee, a Moody’s vice-president/senior analyst and lead analyst for the trust.

‘The confirmation also factors in the trust’s manageable debt maturities and with banks with good relationships with its sponsor, Fraser Centrepoint Ltd (‘FCL’), to facilitate gradual conversion of its short-term debts to term and/or committed banking facilities, which will support its ongoing capital expenditure needs,’ noted Ms Lee. ‘FCT’s conservative financial policy also generates good credit metrics relative to its peers,’ she added. A reflection of this is the debt/Ebitda of six to seven times.

The outlook for the rating is negative reflecting the trust’s asset concentration exposing it to the weak economic environment and property market conditions in Singapore. Furthermore, these conditions render uncertainties in the level of tenant occupation and achieved rentals at Northpoint upon completion of the renovation works expected by Q2 2009.

A return to a stable outlook is unlikely at this stage given the inherent weaknesses in the trust’s operating profile and its limited financial flexibility amid the weak operating environment. Conversely, the ratings could face downward pressure if progress is not made in securing committed medium-term bank facilities to fund the trust’s ongoing capital expenditure over the next few months, and/or should headroom in its unitholders’ funds covenant fall away due to material asset impairments or worse-than-expected rental or occupancy conditions.

By ANGELA TAN

Flat Is The New Up

Modest 1Q09 performance. Frasers Centrepoint Trust (FCT) recorded a 3.7% YoY improvement (-18.3% QoQ) in 1Q09 DPU to 1.67¢, which accounted for 24% of our FY09 estimates (in line) and 22% of the Street’s (slightly below). Operating-wise, topline inched lower by 3.2% YoY (-11.8% QoQ) to S$19.5m, attributable to ongoing AEIs at Northpoint. NPI was down by a wider margin (- 8.0% YoY, -9.0% QoQ) to S$12.8m, due to higher property taxes and other property operating expenses.

Flat (reversions) is the new up. With 90% of FY09 gross rental income already locked in, we reckon earnings should be rather stable for the remaining three quarters of FY09. Any possible growth in FY10 DPU should herald from a full year contribution from the post-AEI Northpoint (annual incremental NPI of S$4.1m, completion in end-Jun 09). Occupancy rate should also then revert to > 90% (88.7% currently), from our view. For FY09F and FY10F, we have tweaked our occupancy levels to 95% (96% previously). Flat (-1% to 2% previously) rental reversion rates have been assumed for the 16.6% and 12.1% in NLA which are up for renewal in FY09 and FY10 respectively. FY09F and FY10F DPU thus slip by 1.5 – 1.8% to 6.9¢ and 7.1¢ respectively.

Maintain BUY at lower fair value of S$0.82. As FCT enters the third major economic downcycle, we cannot stress enough the unfailing resilience of Causeway Point and Northpoint (90 – 95% of topline and NPI), as exhibited by their > 95% occupancy and minimal loss of rental income during the previous two crises. This is not unjustifiable given that their suburban malls target mainly the consumers who shop for non-discretionary items regardless of the general economic performance. Further, we believe supply-side competitive pressures from upcoming malls are insignificant, as there is still a paucity of new malls within the close vicinity of FCT’s properties, aside from the surrounding small mom and pop neighbourhood shops. We also welcome FCT’s move to pass on the 40% property tax rebates within the recent Budget 09 to tenants. At 28.5%, FCT remains one of the lower-geared S-REITs, with its next major loan only due in 2H11. At current levels, the stock is trading at FY09F – FY10F yields of ~ 10%. Maintain BUY at lower fair value of S$0.82 (S$0.86 previously). Key risks include more macroeconomic dampeners and prolonged credit crunch.

Quiet Gem

FCT’s 1Q09 results spring no surprises as it delivered a DPU of 1.69cts on the back of resilient earnings from its portfolio of sub-urban malls. Looking ahead, earnings should remain stable with 90% of its income locked in. In addition, AEI activities at Northpoint will likely boost portfolio revenues and occupancy levels further when completed in Jun’09. As such, we believe that FCT should continue to deliver a sustained FY09-10 DPU yield of c.11%. Maintain buy, TP$0.81 based on DCF.

Results in line. 1Q09 distributable income of S$10.4m(+4.4% yoy) was within 25% of our forecast. DPU of 1.69 Scts was a 4% growth from that a year ago. Gross revenues and NPI were slightly weaker yoy at S$19m (–3%) and S$12.8m (–8%) respectively, due to planned vacancies at Northpoint offset by continued positive rental reversions at Causeway Point. NAV stood at S$1.23 with a low gearing of c.29%.

Defensive earnings. 90% of FY09 income locked in. With over 90% of its FY09 income already locked in, we believe that FCT, with its portfolio of sub-urban malls, should continue to deliver stable cash flows over the course of the current recession. Major mall anchors like Cold Storage and Food Junction catering to serving daily necessities, F&B and non-discretionary spending is likely to keep consumer traffic high.

Maintain Buy. We believe that FCT should continue to deliver a sustainable 11% FY09-FY10 DPU yield to unitholders. Catalyst for the stock will stem from future asset injections in the medium term when capital and credit markets ease, which will improve the liquidity of the stock. Maintain BUY.

Addressing tenant sustainability

• Met expectations. 1Q09 results were in line with Street and our expectations. DPU for 1Q09 was 1.67cts, 24% of our full-year forecast. Gross revenue of S$19.5m deteriorated 3.2% yoy due to planned asset enhancement work at Northpoint. Additionally, property expenses increased 7.5% on higher property taxes. However, net property income margins improved to 65.9% from 63.8%, supported by doubledigit growth in rental reversions for Causeway Point (+18.9%) and Anchorpoint (+17.5%). Portfolio occupancy climbed to 88.7% from 87.7% in 4Q08 as occupancy at Northpoint improved despite ongoing asset enhancement work.

• Budget measures to aid retail tenants. A 40% property tax rebate for commercial buildings has been announced in Budget 2009. Management will be passing on the rebate benefits to its tenants. While this will not result in DPU improvements, it should help to retain tenants, who are facing increasingly difficult retail sales. Other fiscal measures which would ease tenants’ operating costs and stimulate retail spending include: 1) a 12% cash grant of up to S$300 of each employee’s monthly wage to businesses; 2) the underwriting of bank loans to SMEs by the government; 3) a 20% personal income tax rebate, capped at S$2,000; and 4) additional GST credits for households.

• Maintain Outperform and target price of S$1.06. We maintain our DPU estimates. The government’s fiscal measures and management’s decision to pass on tax-rebate benefits to tenants should support tenants’ business sustainability in the short to medium term. FCT remains our preferred pick for suburban retail exposure for its lower 0.52x P/BV vs. CMT’s 0.6x. Maintain Outperform.